Does causality between FDI and trade exist: evidence from South Asia?

This study has twin objectives: first, to investigate the interrelationship between export and Foreign Direct Investment (FDI). Second, we test the causal linkage with import and FDI. For this purpose, we select four major South Asian countries, namely India, Bangladesh, Sri Lanka and Pakistan. The study is based on Granger non-causality test of Toda and Yamamoto (1995) for the period 1990Q1-2007Q4. The evidence shows that there is a bi-directional causality between FDI and Trade. Specifically, our analysis indicates for interrelations between export and FDI as well as between import and FDI in the region. This may reflect the fact that import has played a crucial role in export growth in South Asia. Overall, the results indicate a complementary relationship between FDI and Trade.